The Life Cycle of an Estate: Preparing Your Family for the Estate Administration Process

The administration of a loved one’s estate is, thankfully, an unfamiliar process for most people, and many are surprised to learn how complex and time consuming it can be. Generally, it takes three to five years to fully administer an estate. Unfortunately, this complex and challenging process begins immediately after the loss of a loved one, when each family member is dealing with their loss in their own personal way.

A decedent will typically have spent a substantial amount of time and put a great deal of thought into making an estate plan that directs the ultimate disposition of their assets and how their family will be provided for after their passing.

What can often be overlooked when making an estate plan is the estate administration process necessary to implement the plan and how the family will be provided for during this transitional period.

The estate administration process can be thought of as a bridge that the decedent’s assets must cross to get to their ultimate destination in accordance with the decedent’s plan. It is important for clients to plan for and prepare their families for the period of estate administration so that uncertainty does not add to the stresses for their loved ones in the immediate aftermath of their death.

In this article, we outline, in a broad fashion, the documents that typically govern an estate and important aspects of the estate administration process, discuss some common challenges that families confront during this process, and suggest some steps that can be taken to smooth the path.

Estate Planning Documents

Modern estate plans are typically set out in two documents: (1) a last will and testament and (2) a revocable trust. As a general rule, the assets passing under the will “pour over” into the revocable trust, meaning the will directs that the residuary estate is distributed to the revocable trust. The revocable trust will then set out the estate plan and direct the ultimate disposition of the decedent’s assets.

Last will and testament. The last will and testament will govern any assets that the decedent held in their name. Under this document, the testator — the person who created the will and referred to as the decedent in the estate administration process — will appoint executors (in some jurisdictions referred to as personal representatives), who will be responsible for implementing the terms of the will and filing any necessary estate tax returns.

For the executors nominated under the will to obtain legal authority to act, the will must be admitted to probate. The nominated executors will submit the will to the probate court in the state and county of the decedent’s residence and request that the court admit the will to probate and issue “letters testamentary” evidencing the executors’ authority to act. As part of the probate process, the decedent’s family and any beneficiaries under the will receive notice of the court proceeding. Certain classes of beneficiaries have the ability to object to the will. The probate process can be time consuming. This is especially true since the pandemic because backlogs have developed in the courts, resulting in extended delays.

Until the executors receive authority from the probate court, they cannot act. This means the executors will be unable to collect assets or pay bills. If all of the decedent’s liquid assets are held in their name, there will be no access to funds, and the executors may be forced to look to family members or beneficiaries to pay any urgent bills until they are able to access funds.

Revocable trust. A revocable trust is a trust that is created during life. The grantor (the person who created and funded the trust and referred to in the estate administration process as the decedent) retains full control over the assets of the trust during their life. Upon the grantor’s death, the trust becomes irrevocable and acts as a will substitute, providing instructions as to how the grantor would like their assets distributed.

Typically, during life, the grantor will transfer at least some liquid assets to the trust. In some cases, the grantor and their counsel may determine it is important to avoid probate entirely, and the grantor will transfer all of their assets to the revocable trust.

The trust can be helpful in that the trustees can typically gain access to the assets held in the trust more quickly than executors can access assets held in the decedent’s name. While the process of obtaining and accessing assets is more efficient in a trust than in a probate proceeding, access is not immediate. As a result of various rules and regulations, financial institutions must “know their clients.” The trustees must provide information and documentation to the financial institution holding the assets so that the financial institution can perform due diligence and comply with the “know your client” rules before access is granted.

Responsibilities of the Executors and Trustees

The duties of the executors and trustees during the estate administration (see The Many Duties of Executors and Trustees below) are often more complex than they sound.

Executors and trustees step into the shoes of the decedent with regard to their assets; they must quickly learn about the decedent’s financial life and begin to manage the assets the decedent accumulated. This can be a lengthy and complicated process. Because executors and trustees are responsible for paying the decedent’s taxes and debts, before they can begin to make distributions from the estate and trust, the executors and trustees must first engage in a process whereby they perform due diligence sufficient to determine the extent of assets and the obligations of the estate. This process must be completed before the executors and trustees can make distributions.

The Four Stages of the Estate Administration Process

The estate administration process can be divided into four overlapping stages: (1) the initial stage, (2) the implementation stage, (3) the audit stage, and (4) the final stage. As the executors and trustees move the estate through each stage of the estate administration process, they will be preparing for the next stage and looking back to make sure all necessary steps in the previous stage have been completed.

The initial stage. This is typically the busiest stage of any estate administration and generally lasts nine to 15 months. The executors and trustees will analyze the decedent’s estate plan, determine how best to implement the plan, review the decedent’s lifetime gifting, identify and value assets, determine the debts of the decedent, begin to collect assets, and determine any ongoing expenses that must be provided for. Much of this work is aimed at gathering the information necessary to prepare and file the estate tax return. However, it is equally important for the executors and trustees to be preparing to implement the decedent’s distribution plan and building the books and records that will be needed during the implementation, audit, and final stages of the estate administration process.

As mentioned above, much of the work in the initial stage is necessary so that the executors and trustees can gather the information necessary to pay the estate taxes due and prepare the estate tax return(s) required for the estate. The federal estate tax payment and federal estate tax return are due nine months after the decedent’s date of death (most state estate tax payments and returns are due at the same time, but there are some variations). The due date for filing the federal estate tax return can be automatically extended for six months, but the payment of estate taxes cannot.

The initial stage is generally largely completed once the estate tax return is filed.

The implementation stage. Nine months (sometimes as late as 15 months) after the decedent’s death, the executors and trustees will have a relatively clear understanding of the assets and the obligations of the decedent’s estate. The executors and trustees will now begin the process of making distributions in accordance with the decedent’s will and administrative trust.

While the executors and trustees may be comfortable making substantial distributions in accordance with the decedent’s plan during this stage, the executors and trustees must also keep a sufficient reserve to pay known expenses of the estate as well as provide for unexpected expenses that may come up.

During the implementation stage, the executors and trustees will also collect any assets that have not yet been collected, continue the process of liquidating assets that are to be sold, and work to position the estate to close efficiently after the estate tax proceedings for the estate are concluded.

The audit stage. Estate tax returns are often audited by the Internal Revenue Service (IRS). During an audit, the executors and trustees will be required to substantiate the assets and the valuation of the assets reported on the estate tax returns and the deductions and positions taken on the returns. Experienced executors and trustees are aware of the issues that the IRS typically focuses on during an audit and will have assembled much of the information and documentation necessary to respond to IRS inquiries.

Despite the efforts and preparation that experienced executors and trustees make during the initial and implementation stages to be prepared, audits can take a substantial amount of time to bring to conclusion — the IRS can raise unexpected issues, or new facts may come to light. The executors and trustees may have multiple meetings with the auditor in which they review the assets and positions taken on the return, may be asked for supplemental information, and negotiate a final agreement regarding the changes that will be made to the return. If an agreement cannot be reached at the audit level, the executors and trustees may appeal the positions taken by the auditor.

The complexity of the audit will determine how long this stage lasts. However, the audit stage does not typically extend beyond three years from the date on which the estate tax return for the estate was filed.

The final stage. During the final stage of the estate administration, the executors and trustees will account to the beneficiaries for their activities and make the final distributions directed under the estate planning documents. Beneficiaries may have questions regarding various transactions that occurred during the estate administration process, and the executors and trustees will respond to those questions. Generally, once all of their questions have been answered, the beneficiaries will approve the acts of the executors and trustees and release them from all liability, and the estate will be closed. This stage typically occurs three and a half to five years after the decedent’s death.

On occasion, the executors and trustees cannot answer all of the questions of the beneficiaries, or the beneficiaries are not satisfied with the answers they receive. When this occurs, the executors and trustees may seek to have their accounting approved by the court in a formal accounting proceeding. These are long and expensive processes that beneficiaries, executors, and trustees typically make efforts to avoid.

Common Issues Faced by Families

Three of the most common issues faced by families after the death of a loved one are (1) concerns related to the payment of expenses in the months following the decedent’s death, (2) conflicts regarding the division of tangible personal property, and (3) conflicts regarding disproportionate division of the estate.

Concerns related to expenses. Immediately after the decedent’s death, a surviving spouse or members of the decedent’s family may be concerned with how expenses the decedent paid during life will be provided for in the short term. As discussed above, executors and trustees are typically not able to make distributions in accordance with the estate planning documents for nine to 15 months. As a result, while the plan almost certainly provides ultimately for the family to have sufficient funds for their life, those funds may not be immediately available. At a time when families are mourning the loss of a loved one, uncertainty as to how expenses will be paid may be particularly stressful.

The most common concern for a surviving spouse is how they will maintain their lifestyle once the wealthier spouse who paid the expenses has passed away. Expenses could include maintenance of a home or homes, staff at the residences, club memberships, and insurance.

During the planning stage, it can be helpful for the testator to consider what expenses the surviving spouse may have in the first year after their death and consider providing for the spouse to receive those funds, perhaps from an account that is payable on death to the spouse, like a joint account, or from a life insurance policy, perhaps to be held in an insurance trust. Equally important to arranging to make funds available is discussing with the spouse that the reason the account is being created or insurance acquired is to provide funds to cover the expenses that will need to be paid by them during the estate administration.

Another common concern is tuition expenses. Often, grandparents will pay tuition expenses for their grandchildren. Unfortunately, it is not uncommon for grandparents to pass away prior to their grandchildren completing their higher education. If the decedent’s child is depending on the decedent for the payment of their child’s tuition expenses, the decedent’s death immediately prior to the due date of a tuition payment can cause strain for the child.

Again, the testator should consider how such expenses might be provided for during the estate administration. Grandparents might consider creating a 529 savings plan account or creating and funding education trusts for each of their grandchildren that can be used to fund tuition expenses in the event of the grandparents’ death. Either can provide more immediate access to funds. If the testator did not fund a 529 savings account or create an education trust and is facing serious health issues such that death may be imminent, they might consider making a loan to the child so that the child has funds available for any payments due immediately after their death. The loan can be paid back from gifts the child will receive under the estate planning documents or forgiven under the terms of the documents.

Conflicts regarding division of tangible personal property. Unfortunately, very often the division of tangible personal property (furniture, furnishings, art, jewelry, etc.) can be an area of conflict for families. More often than not, it is not the monetary value of the property that causes the conflict but rather the sentimental attachment that beneficiaries feel for the items.

Testators should consider making their intentions known to their beneficiaries regarding their tangible personal property. If it is important to the testator that specific items are received by each beneficiary, they should make specific gifts of those items to the beneficiary in their estate planning documents or leave a letter that sets out their wishes with regard to the tangible personal property. If the testator would like their beneficiaries to work together to divide the tangible personal property, then the testator can include a provision in their documents that directs that the beneficiaries should divide the tangibles by agreement. In the event that the goal is to have the beneficiaries divide the tangibles by agreement, the testator might also consider including instructions on how conflicts will be resolved — for instance, a fair selection process in which beneficiaries draw straws to determine the order in which they will choose items.

If the testator wishes to give specific classes of items, such as items inherited from their parents, to certain beneficiaries, the testator should consider creating an inventory of those items and referencing that inventory in the documents rather than including a general description such as “items of sentimental value” or “family heirlooms.” It is important to understand that, if no such inventory exists, conflicts may arise regarding what items qualify for the disposition before the beneficiaries who receive the items can begin to divide the items among the group.

Disproportionate divisions of the estate. Often, testators will wish to make a disproportionate division of their estates among their beneficiaries. There are many reasons a testator may decide that their estate should be divided disproportionately: Some beneficiaries may have greater needs than others, beneficiaries may have received gifts during life that the decedent wishes to equalize at death, a parent may wish to recognize one beneficiary who was particularly helpful to them during life, or a family business may be given to a beneficiary who is working in the business — the reasons are as diverse as families themselves.

If the beneficiaries are part of different generations (for instance, children and grandchildren), conflicts are often less pronounced and hurt feelings not as common. However, when beneficiaries of the same generation are treated differently, they can be left wondering about the reason for this different treatment, and this can be painful for the beneficiaries and cause conflicts among them. Testators should not assume that the beneficiaries will understand their reasons for such treatment without explanation. What may be perfectly obvious to the testator is rarely as clear to their beneficiaries.

Testators should consider discussing with their beneficiaries the reasons for such disproportionate treatment. Alternatively, if the testator is uncomfortable with having these conversations, they might consider leaving a note explaining their reasoning.

Conclusion

The estate administration process is long and often challenging and occurs at the same time that families are mourning the loss of their loved one. Sadly, the process itself and the pressures it creates can strain family relationships. Sharing with beneficiaries the broad outline of how the process works and the timeline can be helpful in alleviating some of this strain.

Considering and planning for the needs of family members in the period immediately after death can also be helpful.

Finally, and most importantly, communicating the purpose of the plan that has been created can prevent hurt feelings and family conflict.